TEXT-S&P revises Centene Corp outlook to negative

Mon Jun 11, 2012 3:51pm EDT

Overview	
     -- Centene Corp. recently announced that its operating results
likely will be significantly worse than expected, which has reduced financial
results for full-year 2012.	
     -- We are revising our outlook on Centene to negative from positive and 	
affirming the ratings.	
     -- We could lower the rating by one notch if the company continues to 	
post poor results.	
Rating Action	
On June 11, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Centene Corp. (CNC) to negative from positive. At the same time, we affirmed 	
our 'BB' long-term counterparty credit and senior unsecured debt ratings on 	
the company.	
Rationale	
The outlook revision resulted from Centene's announcement that it expects 	
year-to-date June operating results to be significantly worse than 	
expectations, which will affect financial results for full-year 2012. The 	
results were driven by higher-than-expected medical costs in its Kentucky 	
Health Plan and the Hidalgo service area in its Texas Health Plan, as well as 	
in the Celtic individual health business.	
	
We have revised our adjusted EBIT return on revenues (ROR) margin expectations 	
for 2012 to about 2% from the 3%-4% range. EBITDA interest coverage (including 	
imputed lease obligations interest) would diminish to about 7x from our 	
previous expectation of 10x. We believe that the expected EBIT margin (about 	
2%), EBITDA interest coverage (about 8x), and debt leverage (20%-30%) remain 	
supportive of the current rating.	
	
Centene has produced very stable and good operating performance during the 	
past five years. Centene's adjusted EBIT ROR in 2011 was about 4%, and its 	
five-year (2007-2011) average ROR was also 4%.	
	
Our counterparty credit rating on Centene is constrained by the concentration 	
of its revenue stream in the government-sponsored managed Medicaid programs, 	
with a smaller percentage of premiums coming from specialty services from 	
external customers. This narrow market focus is a key credit risk, as it 	
exposes the company to adverse regulatory and legislative developments. 	
Accordingly, profitability and sustained revenue growth depend heavily on 	
continued government funding for these programs to keep pace with medical cost 	
trends.	
	
Outlook	
The negative outlook indicates that we could lower the rating by one notch if 	
the company's EBIT ROR were to decline to less than 2% for a sustained period 	
or if the loss of one or more of its managed Medicaid contracts resulted in a 	
significant decline in revenue or cash flow from operations. We will consider 	
the new expected level of profitability the reason for the change. If we lower 	
the counterparty credit rating, we would likely also lower the senior debt 	
ratings by one notch.	
	
We expect the company to continue to grow and generate stable cash flow in the 	
intermediate term (12 to 24 months) to meet its debt-service requirements and 	
pay for expenses related to expansion into new markets. In addition, we expect 	
the company to keep its debt-to-capital ratio consistent with recent 	
improvements in the 20%-30% range--barring any large acquisitions. We expect 	
EBITDA interest coverage to remain at least 7x and redundancy of statutory 	
capitalization to stay at the 'BBB' level of confidence as per our capital 	
model. We remain concerned that any significant funding cuts and continued 	
pressure from reimbursement rate compression by states to save money could 	
erode the earnings power from the managed Medicaid sector. Benefits structure 	
and eligibility must be aligned with reimbursement levels.	
	
Related Criteria And Research	
     -- Analysis Of Insurer Capital Adequacy, Dec. 18, 2009	
     -- Holding Company Analysis, June 11, 2009	
     -- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009	
     -- Investments, April 22, 2009	
     -- Double Leverage In Health Insurance, Aug. 6, 2008	
	
Ratings List	
Ratings Affirmed; Outlook Action	
                                        To                 From	
Centene Corp.	
 Counterparty Credit Rating	
  Local Currency                        BB/Negative/--     BB/Positive/--	
	
Ratings Affirmed	
	
Centene Corp.	
 Senior Unsecured                       BB
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